01/02/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
In Asia, regional markets have all started the week lower as stocks slumped after strong manufacturing reports from China spurred concerns that policy makers will look to further rein in growth. The Shanghai Composite is the worst performer, down 2.2%, while the Hang Seng, Nikkei and Kospi are weaker by 1.1%, 0.6% and 0.5% respectively.
Locally, the Australia 200 CFD Index is 0.8% softer at 4534, marginally off the session’s low. The market significantly outperformed leads this morning, however, as soon as Asian markets opened, the selling resumed and accelerated after the Chinese numbers.
There was a big turnaround in material stocks. Rio Tinto, for example, was more than 2% higher early but is now down more than 0.5%.
As we mentioned last week, market sentiment has really turned sour, with the glass clearly seen as half empty. Today’s strong PMI numbers are a classic example – what would normally be seen as positive for growth is now being construed as a negative.
Sentiment and confidence are very fickle in nature, they could quickly rebound, even without any obvious catalyst.
Let’s step back for a second. Potentially we’re 10 months into an economic recovery. On a three to five year basis, broadly speaking, current stock valuations are attractive. With the vast majority of money managers subscribing to the ‘value investing’ discipline, it’s only a matter of time before this market pullback becomes a buying opportunity.
Market Update from the Trading Room – 12.45pm
Australia 200 CFD Index: 4565.5 (-0.1%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Information technology | 0.9% | Utilities | -1.3% | |
| Materials | 0.6% | Property Trusts | -0.9% | |
| Consumer Discretionary | 0.5% | Energy | -0.8% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| BHP Billiton | 4.9 | National Australia Bank | -3.1 | |
| Rio Tinto | 2.6 | QBE Insurance Group | -1.5 | |
| ANZ | 1.5 | Westpac Banking Corporation | -1.4 |
Economics – Jobs may be a lagging indicator, but declining Australian job advertising data should still raise some eyebrows ahead of tomorrow’s RBA interest rate decision. For January, ANZ job ads slid 8.1% following more than 4% growth in both November and December. While the RBA is still widely expected to raise rates by 25 basis points, any slowdown in the job market could make waves in the months ahead as low unemployment levels have been at the forefront of a robust Australian economy.
Economics – Australian inflation levels have continued to rise, gaining for the third month in a row. TD Securities Senior Strategist Annette Beacher said this means the RBA will soon have to start delivering a much more hawkish rhetoric, citing TD's monthly inflation gauge which rose 0.8% on month in January, 2.6% on year. She continued to say “in the light of recent confirmation that the unemployment rate has in fact been falling since July 2009, there is an opportunity to ramp up the hawkish rhetoric via referring to shrinking spare capacity, to assist in dampening future inflationary expectations”.
Energy Resources Australia – In a note from UBS, FY net profit was in line with their forecast. However, UBS lowered their 2010 profit forecast for the miner by 9% on guidance for higher costs. The broker expects ERA's realised uranium prices to rise to about US$61/pound in 2010 as old legacy contracts roll out of the portfolio and are replaced with contracts struck in 2008 (when the average spot price was US$64/pound). UBS maintained their ‘buy’ rating and $26.50 price target.
Aristocrat Leisure - Aristocrat Leisure this morning forecast an annual profit, before one-offs, of $116 million, which they say beats analysts' expectations and sent their shares higher by 11.1%. News, however, isn't all positive. Non-recurring items, including a $187.3 million impairment charge relating to a legal dispute in the US with bondholders, plus others like a write down of their multi-terminal gaming businesses; an intellectual property litigation settlement; property sales and restructuring costs, will result in the company reporting an annual net loss. The impairment charge on the bondholder litigation doesn't presuppose the outcome of the court action, so there's a chance Aristocrat could recoup the costs. Also, in a report from Citigroup the stock was upgraded to ‘hold’ from ‘sell’ after their competitors reported December 2009 earnings. Citigroup said their key takeaway for Aristocrat is that their US unit sales forecasts look in-line with the experience of Aristocrat’s main competitors, adding that WMS Gaming's management is bullish about Australia’s prospects. The broker said despite sluggish replacement demand in recent years in Australia, WMS believes they will capture growing share in Australia given the video content they are introducing.
Qantas – Qantas this morning said they were in discussions with manufacturers on seat configuration, but that it was too early to give plans. The comments follow a report in the Australian Financial Review that Qantas plans to get rid of two-thirds of first-class seats as part of $400 million reconfiguration. The plans, if correct, aren't a major surprise as Qantas had flagged a seat reconfiguration a few months back. However, the cost of changes and the major cuts in first class seats could unsettle some. According to the report, the cost would be spread over four years, with first class seats left only on some flights between Sydney and Los Angeles and Sydney and London.
Overnight Market Report - 9.00am
US stocks fell again on Friday, closing down for the third straight week and posting the biggest monthly loss since February 2009.
Weaker-than-expected results from technology giants, Qualcomm & Motorola, and surging Greek bond yields, rattled investor confidence, despite a larger-than-expected US GDP reading of 5.7%.
The tech laden NASDAQ fell 1.5% on Friday, while the broad-based S&P 500 lost 1% and the Dow Jones Industrial Average weakened by 0.5%. For the month, the NASDAQ retracted more than 5%, while the Dow Jones and S&P 500 were down more than 3%.
The last two or three weeks have seen the market ignore positive fundamentals, especially earnings. The market was priced for perfection. As soon as cracks began to emerge in the recovery story, the sellers appeared from everywhere.
Turning our attention to the local market, SPI futures are calling the ASX 200 to open 0.9% lower at 4527.
The theme of materials weakness is set to continue this morning despite a 1.3% and 1.5% gain in London for BHP Billiton and Rio Tinto. A 1.6% fall in the S&P Materials sector, coupled with mostly bearish leads from the base metals will likely see our materials stocks drag yet again.
Energy stocks are set to underperform again as Crude Oil futures lost 1.5% to be trading around $72.64. The energy sector was the worst performer among US sectors too.
The financials will likely come under pressure after a 0.7% fall in the S&P Financial sector.
On the upside, we may see some relative outperformance from the defensive healthcare and consumer staples sectors. However, it’s highly unlikely it will be enough to offset the selling elsewhere.
In economic news, the ANZ job ads survey and the Home Price Index are due at 11.30am today. However, most of the attention will be on tomorrow’s RBA interest rate decision. The market is factoring in a 60% chance of a 25 basis point hike. However, given recent volatility in equity markets and economic data, we feel the decision will be line ball. Don’t be too surprised if they hold rates.
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